As of today (2023-06-07), Paychex's weighted average cost of capital is 9.47%. Paychex's ROIC % is 18.04% (calculated using TTM income statement data).
Paychex generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.
Paychex WACC % Historical Data
The historical data trend for Paychex's WACC % can be seen below:
* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD. * For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.
* Premium members only.
Paychex Annual Data
Trend
May13
May14
May15
May16
May17
May18
May19
May20
May21
May22
WACC %
8.59
8.42
6.47
6.63
8.57
Paychex Quarterly Data
May18
Aug18
Nov18
Feb19
May19
Aug19
Nov19
Feb20
May20
Aug20
Nov20
Feb21
May21
Aug21
Nov21
Feb22
May22
Aug22
Nov22
Feb23
WACC %
7.07
8.57
9.38
9.79
9.87
Competitive Comparison
For the Staffing & Employment Services subindustry, Paychex's WACC %, along with its competitors' market caps and WACC % data, can be viewed below:
* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap. Note that "N/A" values will not show up in the chart.
Paychex WACC % Distribution
For the Business Services industry and Industrials sector, Paychex's WACC % distribution charts can be found below:
* The bar in red indicates where Paychex's WACC % falls in comparison to its industry or sector. The grey bar indicates the WACC %'s extreme value range as defined by GuruFocus.
Paychex WACC % Calculation
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.
WACC
=
E
/
(E + D)
*
Cost of Equity
+
D
/
(E + D)
*
Cost of Debt
*
(1 - Tax Rate)
1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, Paychex's market capitalization (E) is $40344.549 Mil.
The market value of debt is typically difficult to calculate, therefore, GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Short-Term Debt & Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of Feb. 2023, Paychex's latest two-year average Short-Term Debt & Capital Lease Obligation was $8.05 Mil and its latest two-year average Long-Term Debt & Capital Lease Obligation was $881.1 Mil. The total Book Value of Debt (D) is $889.15 Mil.
a) weight of equity = E / (E + D) = 40344.549 / (40344.549 + 889.15) = 0.9784
b) weight of debt = D / (E + D) = 889.15 / (40344.549 + 889.15) = 0.0216
2. Cost of Equity:
GuruFocus uses Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)
a) GuruFocus uses 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 3.79100000%. Please go to Economic Indicators page for more information. Please note that we use the 10-Year Treasury Constant Maturity Rate of the country/region where the company is headquartered. If the data for that country/region is not available, then we will use the 10-Year Treasury Constant Maturity Rate of the United States as default.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Paychex's beta is 0.97.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.
Cost of Equity = 3.79100000% + 0.97 * 6% = 9.611%
3. Cost of Debt:
GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.
As of May. 2022, Paychex's interest expense (positive number) was $36.6 Mil. Its total Book Value of Debt (D) is $889.15 Mil.
Cost of Debt = 36.6 / 889.15 = 4.1163%.
4. Multiply by one minus Average Tax Rate:
GuruFocus uses the latest two-year average tax rate to do the calculation. The calculated average tax rate is limited to between 0% and 100%. If the calculated average tax rate is higher than 100%, it is set to 100%. If the calculated average tax rate is less than 0%, it is set to 0%.
The latest Two-year Average Tax Rate is 23.575%.
Paychex's Weighted Average Cost Of Capital (WACC) for Today is calculated as:
WACC
=
E / (E + D)
*
Cost of Equity
+
D / (E + D)
*
Cost of Debt
*
(1 - Tax Rate)
=
0.9784
*
9.611%
+
0.0216
*
4.1163%
*
(1 - 23.575%)
=
9.47%
* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD. * For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.
Paychex (NAS:PAYX) WACC % Explanation
Because it costs money to raise capital. A firm that generates higher ROIC % than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.
As of today, Paychex's weighted average cost of capital is 9.47%. Paychex's ROIC % is 18.04% (calculated using TTM income statement data).
Paychex generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.
Paychex is a leading provider of payroll, human capital management, and insurance solutions servicing small and midsize clients primarily in the United States. The company, established in 1979, services over 730,000 clients and pays over 1 in 12 U.S. private-sector workers. Alongside its traditional payroll services, Paychex offers HCM solutions such as benefits administration and time and attendance software, as well as human resources outsourcing and insurance agency services.
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